Closing the Gap: Building Black Dollars
Learn about wealth gaps, pay gaps, social justice investing, and more.
Keith Reid-Cleveland: Hello everyone, and thank you for joining us for Closing the Gap: Building Black Dollars. I'm Keith Reid-Cleveland, the moderator for today's discussion. Juneteenth, often known as Freedom Day, recognizes the emancipation of enslaved people of the United States. It's only two days away and likely a few hours from becoming a federal holiday. But today, we're going to focus towards the future. Today, we're going to focus on steps you can take to get on the path towards financial freedom. But first, some quick housekeeping notes before our discussion.
We encourage everyone viewing this at home to join the chat and ask any questions or give any comments you may have. And if not that, feel free to email us and give us any feedback for the event at email@example.com during the event as well as afterwards.
Today, we'll be discussing how Black investors can overcome the unique financial challenges that they face. We'll also be discussing strategies on how to build wealth and how to invest within your values.
Joining me today are two financial professionals, Rachel Robasciotti and Brian Thompson. I'm also joined by my colleague, behavioral researcher Michael Thompson. Now, to start us off. There are many unique challenges that Black investors face, one of the most common being the racial wealth gap in and of itself.
According to the Federal Reserve, the median Black family in the United States have 13 cents for every dollar the median white family has. Another unique challenge would be the Black tax: the idea that Black Americans have added costs compared to those of their white counterparts just from their own lived experiences.
Brian, how can these issues be best addressed, and are there any other unique challenges to Black investors that we may not have touched on yet?
Brian Thompson: Well, first of all, thanks for having me, Keith. It's a pleasure to be here and a pleasure to be here with all of you.
Brian Thompson: Thanks. And I feel like the thing that we can do the most is create awareness around this first. Make sure that we have a good understanding of what the problem is before we try to resolve them. And accept where we are, and then we can figure out then some actions from then to solve the problem. I'm glad we're here to solve that today.
Reid-Cleveland: Rachel, do you have any thoughts you'd like to share?
Rachel J. Robasciotti: Yes. Some of the unique challenges that Black investors face, that we really face, come from the fact that we are inside of a system with many institutional structural advantages to white families and white people. So, for example, Black folks are less likely to own homes, and there's a huge mortgage interest deduction that reduces the amount of taxes and therefore increases the take-home pay and the opportunities for wealth that white folks have. There's also that we are less likely to be married, and there's a huge deduction, right, or a huge reduction in taxes that can come from being in a situation where you're married and have one high earner, one lower earner--kind of like that traditional white family setup. And so just in a number of structural ways, it's not necessarily always that we've been targeted as much as the white individuals and families in this country have been given numerous advantages. And so I think those are some of the very unique issues that come up for us and that, hopefully, we'll be diving into ways to address those together today.
Reid-Cleveland: Definitely. Thank you very much for that insight. For our next question: Savings is at the heart of any investing strategy. And to put it simply, you can't invest what you don't have. And Morningstar research shows that, for every dollar, the median white family saves 6 to 8 cents, whereas the median Black family saves a penny or less.
Michael, given your current research into savings rates, what do you think are some of the main drivers behind this gap?
Michael F. Thompson: Thanks, Keith. I'm honored to join you, Rachel, Brian, and our large online audience today. I'm also excited to share some research we're doing here at Morningstar. I've been working with Steve Wendel, our head of behavioral science, to examine 10 different types of savings with data from a nationally representative sample of households over the past 30 years. And what we find is this large gap has existed throughout this period. And the number-one factor driving this gap is income. And when we compare families with the same income, most of the racial gap actually disappears. This means that the key driver is not cultural. And probably the best way to address the racial savings gap is to reduce the racial pay gap.
There's also tremendous variation between households. And we noticed the biggest difference is actually within racial groups, not between racial groups. But all that to say, we did focus more specifically on the data. And to get as fair comparison of households as possible, we focused on looking at typical or median households by race in the middle of the U.S. distribution. We also try to use an intersectional approach to account for several factors at the same time that might affect saving. So, income, gender, age, education, and region. And here's what we're seeing so far.
When we look at gender--and this is comparing Black and white and Hispanic families that are otherwise quite similar--but we compare those headed by women versus those headed by men and find that the households headed by women save less. And this is something that's making us realize that we should focus maybe a little bit more on the gender pay gap beyond the racial pay gap as well. And we should also look at the number of working adults within households, especially since we don't see differences due to marriage or the number of children.
When we look at age--again, comparing families that are otherwise quite similar--among Black households, we see the biggest increase in savings doesn't occur until after 45 years old, which is actually quite late. And it will take a lot longer maybe for some of these households to achieve enough income or secure employment with retirement accounts. And this could, of course, greatly reduce opportunities for lifetime savings when you start that late, to really increase your savings rates.
When we look at education--again, comparing families that are otherwise quite similar--and first, we look at all families across the U.S. that are not headed by a college graduate. They are among those families we don't see a racial gap, but the racial gap starts to really increase when we look at college graduates. And there we see that Black families with a college graduate as a head of household, they do save more than less-educated households. But white families led by college graduates save even more. And this causes us to wonder whether there's something going on where a higher education may improve savings for low-income families, but among higher-educated families, college debt might be a major contributor to holding them back from being able to save.
Finally, we look so far at region. And again, comparing families that are otherwise quite similar, we see that Black families in the South are saving more than those in the Midwest. So, we're trying to understand some of the differences in the regions. And we notice in the South, there's lower racial segregation and higher proportions of minority-owned businesses and higher bank account ownership. So again, these might be some reasons behind what's going on with the gap there, and the difference in the gap and why it's less in the South.
These are broader results that we have so far. And we're hoping these broader results can help Morningstar and other partners and organizations interested in this problem to work on interventions that help all families to save more. But realizing that not one size fits all, we want to figure out ways we can help Black households in particular. And for that, we would need specific strategies that look at income, gender, age, education, and region for much broader holistic approach.
Now, of course, we're very interested at the individual level, because individual households have competing financial obligations that might prevent saving. There might also be a lack of trust in financial institutions due to past discrimination.
I'm really interested in hearing what our panelists might have from their actual experience on the ground with everyday investors to understand what they might be noticing that might account for this low level of savings, and I don't know if I can put Rachel on the spot first to find out more about what you might be seeing that might be holding some Black families back from saving.
Robasciotti: Before I was an asset manager, so before I managed a fund, we did a lot of financial advising. And one of the primary things that you realize is that having financial education is really key to establishing comfort with investing the wealth, which is what helps to build it. And what we know is that, in this country, we do not have a system of financial education, particularly, the education about investing, being a core part of our public education system that is free and accessible to everyone. What we do have is an educational system that tends to pass down knowledge and wisdom within families and often from father to son.
Well, given the way that our country was set up, and given that wealth is mostly in the hands of white families, you can imagine that that education about how to preserve and grow wealth is something that's being passed down within certain families, and we just don't have avenues inside of the Black community. No consistent avenues for ensuring that that happens.
Now on top of that educational gap, we also just as a community don't end up having as much money because we don't inherit the funds that would allow us to have debt-free college education, as you were mentioning. You graduate college, and you have debts. And often, as is the case with me personally and many other successful Black professionals that I know, we're not only supporting ourselves, but we also have extended family members to support, just because of the total community impoverishment that's happened as a result of the injustices that are part of living in the United States as a Black person.
Reid-Cleveland: Thank you, Rachel. Brian, do you have any thoughts you'd like to add to that?
Brian Thompson: Yeah. I just want to echo everything that Rachel said. I feel like it's an education issue, it's a resource issue, and it's also what we're talking about with the Black tax, meaning people who make it needing to take care of their family and other people who haven't made it yet. And so we have all of these other competing issues that we have to take into account when we're building our wealth and trying to pass it on. And I love what Michael was saying about--it's not a one-size-fits-all thing. We need to take into account intersectionality and race and gender and sexual orientation. We're trying to figure out how to solve this problem, and it will be different for different areas and different families and different sizes. And if we can figure out how to bring those all together, I think that will be better.
Reid-Cleveland: Yeah. I'm sure we're all looking forward to that research coming out. Michael, please keep us posted on when that happens.
Moving on now: Federal and local governments have been working on exploring policies like reparations and baby bonds to help close the racial wealth gap for a few years now. For those who don't know, "baby bonds" refers to a government policy that would see children born to families with lower incomes receive funds on an annual basis until they turn 18 years old. And the idea is that they will take those funds, which could potentially be as high as $50,000, and use that to kick-start the next phase of their lives, which would be used to pay for school or to buy a home--something along those lines.
Rachel, my question for you is: Is a government-supported approach a valid solution in closing the racial wealth gap?
Robasciotti: Reparations by the United States government is absolutely a valid approach. Just to break it down very simply: If someone is in a fight, right, and they're in the process of hurting another person, of course, you want to stop the harm. But if that person has been injured, isn't it also incumbent upon that person that brought about the harm to actually help the person who's been harmed seek care to actually repair some of the trust that was broken and maybe even the body that was broken? Reparations is about repair--that's the root of the word. And it's about repair of what was taken from Black folks. And the government has taken from the Black community, which means that we need big government solutions to some of the systemic problems that we have, and also the finance and investment industry has a huge debt to pay.
I just want to give you a couple of examples there. The United States government has directly benefited from the theft of Black life and labor. Not only was the White House itself built by slaves, but many Black individuals have performed military service and been denied benefits that white individuals have received like the G.I. Bill. And so while Black hands have helped to build the country, we don't necessarily get the alternate side, the benefits from it. In fact, whenever there's an economic downturn, the Black community is referred to by many economists as what's called the "reserve group." So when it's time for folks to lose jobs, because COVID happens or some other major event, it's the Black community that mostly suffers. For stable societies to function, you have to have some group that takes the hit, so to speak. And so Black folks have not only built this country, but kind of continue to take the economic hit.
I think that there's a huge debt to be paid by the government there. Also, I just want to point out, because we're talking about finance, that the finance industry that has for so long said, "This doesn't have anything to do with us"--the finance industry has a huge debt to pay as well. Our industry was the distribution and management system that allowed slavery to function as an economic model. What is now Wall Street was actually built by enslaved people. And it actually became the official home of the slave market for New York. What most people don't know who are in finance is that the first American bond market started with enslaved people as collateral for lending. So the very first mortgages in this country were not on homes, they were on people's lives. And today, we manage still in finance and distribute wealth that was largely accumulated by that theft of life and labor. And I believe that in as much as the United States government has reparations that are due to Black individuals and families, so does the finance industry as a whole for our part in it.
Reid-Cleveland: Thank you very much for that insight, context, and history lesson as well, Rachel.
Brian, same question. Would a government-sponsored solution be a viable option, and what benefits could it bring to closing the racial wealth gap?
Brian Thompson: Absolutely. Like Rachel pointed out, the government has been responsible for how we got into this situation in the first place. And whether it is slavery or redlining or whatever it is, it's a part of the bigger solution, a part of the systemic problem that we face. And so we need bigger systemic solutions in order to make sure that we are on the same level and are on the same playing field, and, like Rachel was saying, are repairing the harm that's already been done and that has really stunted our growth for centuries after centuries. We take two steps forward and then we have to take three steps back because of racism or systemic discrimination. I think it's going to take a lot of solutions, obviously, starting with the government and big policy solutions. I'm happy to see the Biden-Harris Administration step up and say, "We need to close this racial wealth gap, and we need to focus on homeownership and investing in Black businesses." That's a start, and then we'll see where it goes. But we definitely need everything and everyone involved.
Reid-Cleveland: Definitely. And Michael, given your background on sociology, do you have any thoughts you'd like to add to the topic?
Michael F. Thompson: Oh, sure. I think there's always a debate among people who try to solve these major challenges we have in inequality on whether or not government programs should be specific to a particular racial, ethnic, or minority group or whether they should be broad-based and help everyone at the same time. And I think that's the thing that's really interesting about that research that Aron Szapiro and Lia Mitchell did here at Morningstar that focuses on that baby bonds initiative that's being put around Congress. That program would actually help everyone but should help minority families disproportionately more even as it's helping everyone. So sometimes, maybe that's an opportunity where you can get a universal program pass that could help reduce the racial wealth gap. I think the estimate was that it would reduce it down to just 56% from where it is right now over 90%. Just from having a program like that, it actually is to help everyone.
But I agree with the panelists in the sense that I think the same ways in which the government might have had policies in the past that might have contributed to the racial wealth gap, the government could also be now trying to rectify it by having the solutions that can help resolve that gap.
Reid-Cleveland: Thank you. All very good answers, for sure. And before we move on to next topic, I at least wanted to remind everyone at home to please add your questions to the chat to be a part of the conversation. And if not that, be sure to email us after the event at firstname.lastname@example.org.
Now, Rachel, after someone leaves this conversation and starts to or continues to build their wealth, they may find it interesting trying to find ways to invest in ways that align with their personal values. Where should they start with that?
Robasciotti: Well, this is true no matter what color you are. Everyone that is getting help with investing and managing their own finances wants to work with someone who really understands them. Ideally, I think that if we were all honest, we would say, "Actually, I want someone that is a lot like me." Only this is what they do full time. It's just harder for Black individuals and families to find those Black professionals. A couple of good resources are an organization that goes by the name "Quad-A" for the four A's: it's the Association of African American [Financial] Advisors. There's also CHIP Professionals, which helps Black and Latinx folks find people in the financial professions that kind of mirror their demographics.
If you aren't ready to go the full route of hiring a person and you want to invest in a way that isn't perpetuating the harms, the systemic harms, there are values-aligned funds, and Adasina Social Capital has one of those funds. Ours is the Adasina Social Justice All Cap Global ETF [JSTC], and there are others with racial justice focus, though there aren't too many of them.
When you have a fund, it's a collection of investments. And that collection of investments can be put together in a way that focuses on eliminating systemic racism or not. And it can really be a shortcut kind of way to invest in a manner that's aligned with your values without having to go through the entire process of finding a financial professional. But I think both are really wonderful, viable options.
If you go to our website, Adasina has put out a racial justice impact data set. If you are an investor and you care about the Black community and you want to make sure that you're not investing in companies that are perpetuating systemic racism, you can go there and see the list of companies that we exclude from our own portfolios. And in an act of reparations, we've made that list available to all individuals, whether they're professional investment managers or not. It's public and on our website.
Reid-Cleveland: Thank you so much for the resources, Rachel. I was actually going to ask you a follow-up about where someone could go to find the way to do this, so you already answered my question. Thank you very much.
Brian, same question. Where should someone look if they're trying to find a way to invest that aligns with their personal values?
Brian Thompson: I think starting with getting help is the first place to look, and Rachel gave a couple of great resources. I will also throw in the CFP Board, XYPN, and NAPFA. They have fee-only advisors that are focused on being fiduciaries and making sure that they are investing in your best interest, rather than investing in a way or planning in a way that is for them, and just suitable for you. I think it's important to find somebody that can actually listen to you and understand what your values are because everybody's values are different. And even if you are a Black person or an LGBTQ person, somebody that can listen very well to what you need and what you want and help you align what you need and what you want with how you're going to use your money. Because in the end, your money is a tool, and we want to make sure that it's being used to support the life that you want rather than just make more money because, in the end, that's not going to make you happy. So finding somebody that can listen. I agree with Rachel as far as there are ETFs and other investment tools that you can use. But again, it starts with that internal work of: What I want, what do I want my life to look like, and how can I use my money to make sure that I'm living the life that I want?
Reid-Cleveland: Thank you very much. I hope our viewers took a list of those resources, and they use those to their advantage later on. This next question is one that I'm very curious to hear the answers about because, anecdotally speaking, I've seen it come to my own peer group especially. More people are hearing about meme stocks and cryptocurrency as the days go on, as it seems. Black investors have actually been found to use them at even higher rates, with a recent Harris Poll survey finding that 30% of Black investors surveyed held cryptocurrency this year compared to just 17% of white investors.
Brian, we'll start with you. What should people know about these kinds of investments given that they're more volatile than most?
Brian Thompson: That's number one, that they're more volatile than most. And so you need to know what you're investing in and know why you're investing in it. I understand that it's a new trend, and I understand that people feel left out of the regular system. So, I get it. Just be intentional and make sure that you know what you're getting into and you understand the risks that are associated with this. I usually give my clients "play money," right--5%-10% of your portfolio, investment in whatever you want. Practice, learn, but make sure that the core of your portfolio is in low-cost, diversified investments that you can throw money at for the long term.
Reid-Cleveland: Great. Rachel, anything you'd like to add?
Robasciotti: Yes, I testified before the Senate committee that oversees the financial markets, specifically about these meme stocks, about GameStop and the Robinhood fiasco that happened earlier this year. And what I will say is that the meme stock phenomenon is about individuals coming together. Usually, they found one another on Reddit or other online forums, and they're choosing to increase a particular stock price by having some coordinated action together with one another. And in doing so, they're a little bit saying, "Hey, we're going to, actually, by banding together, take some money from the house, so to speak--the larger players that tend to always win."
The trouble with that--this reminds me a lot of the MIT students that banded together to kind of count cards and take the house down in Atlantic City and some other places. The trouble is that you have these high-risk individuals that are buying the meme stocks, right? And they kind of have a chip on their shoulder. And then you have these large institutional players that are kind of like the house. Both of these two sets of folks have high appetites for risk. And in the end, everyday Americans need an opportunity to save in a way that is not going to have extreme volatility, really high highs and very low lows and lots of uncertainty.
Where it comes to me and my family and the clients that I've worked with over the years, I say, "Haven't we had enough of that sort of risk?" I'm not in it to be an MIT student or the casino. I'm in it to actually save and really accumulate wealth in a way that benefits me, my family, and community. And I really find that highly diversified funds, just like Brian said, are really the better way to do that. So it's really about assessing what's your own appetite for risk. Are you one of the MIT students or the casino hedge fund type folks? If you're not, there's probably another place we should let them duke it out between themselves, and the rest of us should probably do some nice diversified investing via funds.
Reid-Cleveland: Thank you very much. And I'm starting to see a pattern here in the conversation: It's that no one's investing journey is the same as anyone else's. When it comes to diversifying and just different risks that they take and what you just talked about, Rachel, is that there are different levels of risk that different people want to take on. That's going to come up in a question I have for you all later. But for now, we're going to ask some questions that we got in advance and from the audience and also today in the live chat. And we'll get to those and we have more if anyone wants to add to those conversations as we go on.
The first question I have is actually good for both Rachel and Brian. So whoever wants to take it first, please speak up. We seem to get financial advice from every direction, whether it be from family and friends, books, social media, or any possible place outside of that. How does someone know that the financial advice that they're getting is viable and trustworthy?
Brian Thompson: After you, Rachel.
Robasciotti: Thank you, Brian. And I actually think that Brian offered some really wonderful resources that I hadn't mentioned: the XY Planning Network, NAPFA, which Brian will have to help me with what that acronym stands for. It's the National Association ...
Brian Thompson: ... Professional Financial Advisors.
Robasciotti: Thank you. At the CFP Board. These are all places where the individuals that you're working with have sworn to keep your best interests at heart. And I believe that if you're going to get advice, paying someone for that professional work is definitely worth doing, if you're in a position where that's something that makes sense for your budget. But also just making sure that they are in a fiduciary position where they've taken an oath, either to their professional group or often also to the government, saying that they will put your interests first is a really important way of knowing that you're getting the kind of advice that's in your best interest.
Brian, what would you add to that?
Brian Thompson: Yeah. Having a fiduciary on your side, I think, is the best approach. And if you can't afford that, there are people that have created smaller groups. My friend, Pam Capalad, created a investment group just for people of color, and it's focused on having a group community because people can't afford an individual advisor. So you're paying $50 to $150 a month, which is much cheaper than most advisors are, but you're still getting the benefit of being able to talk and discuss finances with a financial professional and then with other people who are your peers.
And I think the important part to sort of understand the source, even if you are looking up an advisor on NAPFA or XYPN or wherever, look at their credentials. To me, CFP is the minimum that they should have. And if they have a JD or additional knowledge or experience, I think that's also important. Know who you're getting involved with and take your time to really get to know this person. I always tell people who are coming to me, "Talk to two other people. Make sure you're talking to three people that you figure out is the best fit, and know their background, know their history, and then make a decision on who feels the best for you, and be able to go forward that way."
Reid-Cleveland: Go ahead, Rachel.
Robasciotti: I would just add, Brian, that's such good advice. Trust your gut. In the end, you want to be working with someone whose advice you'll really take and feel good about. So if you're starting off not feeling so sure, it's best to keep looking.
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